Thursday, December 31, 2015

Loved the new “Fantastic Four” but hated the latest “Star Wars”
movie? Are you a fan of the short-lived Diet Crystal Pepsi but not
Arizona Iced Tea?

Then you’re at odds with many people but perhaps part of a group that scholars have labeled “harbingers of failure.”

“The people who are buying failures keep buying failures,” said
Duncan Simester, one of the researchers and a marketing professor at the
MIT Sloan School of Management. While Simester and his colleagues
studied shoppers’ decisions about packaged goods, the same tendencies
could apply to choices in financial markets, with stock-picking, and
among cultural offerings, such as books, music and movies.

That means that in addition to relying on focus groups and instinct
to decide which creative endeavors to back, publishing houses, music
labels and movie studios might want to gauge how harbingers of failure
react to a new project. If it’s a unanimous thumbs-up, the house may
well have a loser on its hands.

The study, published recently in the Journal of Marketing Research,
refines the notion that when pushing a new product, any followers—and
sales—are welcome. Instead, Simester said, the findings suggest that
“you’ve got to think about who’s buying” the product—whether a new book
or a bottle of shampoo. If shoppers with “mass-market” tastes are lining
up for the new offerings, that’s “fantastic,” he said. “But if it’s
these harbingers buying them….and if they keep buying them…then you’ve
got a problem.”

The authors define failures, such as Frito Lay Lemonade, as products
that didn’t click with shoppers within three years of their debut on
store shelves. By contrast, successful items, such as the Swiffer mop,
caught on after their launch....MORE

One of the recurring themes on this blog has been the consequences of
robots, AI, or rapid technological change on labor demand. Will humans
be put out of work by robots, and will this mean paradise or
destitution? I’ve generally argued that we should be optimistic about
robots and AI and the like, but others have made coherent arguments for
pessimism. I spent a chunk of this week reading over posts, both new and
old, and thinking more about these positions.

If there is one distinct difference between the robo-pessimist and
robo-optimist view, it is almost exclusively down to timing. The
pessimists are worried that the rapid decline of human labor is
occurring now, and in many cases has been occurring for a while already.
The optimists believe that we have time in front of us to sort things
out before human labor is replaced en masse.

Brynjolfsson and McAfee‘s latest is a good example of this robo-optimist view. They concede that human labor is in danger of being replaced:

But will there be enough demand, especially over the long term, for
those two types of human labor: that which must be done by people and
that which can’t yet be done by machines? There is a real possibility
that the answer is no—that human labor will, in aggregate, decline in
relevance because of technological progress, just as horse labor did
earlier. If that happens, it will raise the specter that the world may
not be able to maintain the industrial era’s remarkable trajectory of
steadily rising employment prospects and wages for a growing population.

But at the same time they do not think this is imminent:

But are our interpersonal abilities the only ones that will allow us to
stave off economic irrelevance? Over at least the next decade, the
answer is almost certainly no. That’s because recent technological
progress, while moving surprisingly fast, is still not on track to allow
robots and artificial intelligence to do everything better than humans
can within the next few years. So another reason that humans won’t soon
go the way of the horse is that humans can do many valuable things that
will remain beyond the reach of technology.

On the robo-pessimism side, Richard Serlin
has a mega-post about the declining prospects for human labor and the
possible consequences. What is interesting about Richard’s post is that
he essentially makes the case that the replacement of human labor by
automation has been occurring for decades; we are already living with
it....MORE

New front futures (Feb.) are trading up 12.6 cents at 2.340 but we really don't care.*
First up, Investing.com, who I believe are referring to the Platts estimates:

Natural gas futures held on to sharp gains on Thursday, the last
trading day of the year, after data showed U.S. natural gas supplies in
storage fell more than expected last week.

Natural gas
for delivery in February on the New York Mercantile Exchange rallied
11.1 cents, or 5.04%, to trade at $2.325 per million British thermal
units during U.S. morning hours. Prices were at around $2.333 prior to
the release of the supply data.

Trading volumes are expected to remain light, reducing liquidity in the market which could result in exaggerated moves.

The U.S. Energy Information Administration said in its weekly report that natural gas storage
in the U.S. in the week ended December 25 fell by 58 billion cubic
feet, broadly in line with expectations for a decline of 57 billion.

That compared with a drawdown of 32 billion cubic feet in the prior
week, 26 billion cubic feet in the same week last year, while the
five-year average change for the week is a drawdown of 98 billion cubic
feet.

Total U.S. natural gas storage stood at 3.756 trillion cubic feet,
14.2% higher than levels at this time a year ago and 12.0% above the
five-year average for this time of year....MORE

And from Bloomberg, who do their own survey:

Gas Extends Record Year-End Rally as New Yorkers Brace for Cold

New Yorkers who basked in Florida-like weather this month are going
to have to dig out winter gear next week. That prospect is stoking a
record year-end rally in U.S. natural gas.

Gas futures have surged
28 percent since mid-December, the biggest rebound for the period in
New York Mercantile Exchange data going back to 1990. Prices had fallen
to a 16-year low earlier this month because of unusually warm weather in
the Midwest and Northeast, the biggest consumers of the heating fuel,
and record stockpiles. Forecasts have since turned frigid, with
Manhattan’s low temperature on Jan. 4 sliding to 21 degrees Fahrenheit
(minus 6 Celsius), 6 below normal, said AccuWeather Inc.

“These
are wild days,” said John Kilduff, partner at Again Capital LLC in New
York. “We got prices so low like it was going to be Florida in the
Northeast for the entire winter, and obviously that’s not going to be
the case. Once that hit, prices rebounded.”

Futures Price
Gas
for February delivery climbed 11.6 cents, or 5.2 percent, to $2.33 per
million British thermal units at 9:50 a.m. on the Nymex. Prices have
jumped 15 percent this week and are up 4.3 percent in December, heading
for the first monthly gain since June. The market will be closed Friday
in observance of New Year’s Day.

Overnight weather models now show
up to two to three colder-leaning weeks “due to a slight hiatus in warm
El Nino,” Matt Rogers, president of Commodity Weather Group LLC in
Bethesda, Maryland, said in an e-mail. There will be a stronger cold
push on the East Coast early next week than previously anticipated.

This
blast of cold weather in the East may boost gas withdrawals from
storage caverns into the triple digits as early as next week, especially
because draws have been a bit stronger than mild weather would have
suggested this month, Kilduff said.

A U.S. Energy Information
Administration report scheduled for release at 10:30 a.m. in Washington
will probably show that inventories fell by 56 billion cubic feet last
week, based on the median of 18 analyst estimates compiled by Bloomberg.
Estimates were for declines ranging from 18 billion to 78 billion. The
five-year average drop for the period is 95 billion, while last year’s
was 29 billion....MORE

On Dec. 26, ISIL social media accounts shared an
audio message from al-Baghdadi, believed to be his first public
statement since May, when the terrorist group released an audio
recording to prove its leader was still alive after he was believed to be injured in an airstrike. Iyad El-Baghdadi, a writer and human rights activist, tweeted a translation of the new message, which included a call to arms:...MORE

Alinsky's Rules for Radicals, RULE 5:

“Ridicule is man’s most potent weapon.” There is no defense.
It’s irrational. It’s infuriating. It also works as a key pressure point
to force the enemy into concessions.

It's also easy to do when one is safe in the tower waiting for the market to open.

FT writers indulge in a feast of predictions — from the price of oil to Vladimir Putin’s next moves

A New Year beckons and the Financial Times once more indulges in the
ritual of forecasting the 12 months ahead. Our experts and commentators
set caution to one side and predict what will happen in everything from
the US presidential election to the Euro 2016 football tournament.

A quick judgment on how they did last year. Ed Crooks correctly forecast that the oil price
had further to fall, a brave claim at the end of a year in which it had
already halved. Martin Wolf said the ECB would adopt full quantitative
easing, which it did. Clive Cookson rightly opined that Ebola
would be eliminated in west Africa by the close of 2015. Gideon Rachman
said Vladimir Putin would annexe no further territory in Ukraine and
Europe. Not many at the end of 2014 were saying that.

We got one wrong. Jonathan Ford was among many who
assumed the British general election would end in a hung parliament (he
went so far as to predict a national government). Otherwise, the fault
last year lay not with the answers we gave but the questions we failed
to ask. We did not foresee a surge of Isis-sponsored terrorism in France; that Russia
would take military action in Syria; and that the migrant crisis would
become a grave threat to the EU. In 2016 too, events will happen that
are as yet beyond our imagination. James Blitz

Will Hillary Clinton win the US presidential election?

Yes.
It will be a rollercoaster election — and the nastiest in memory. Mrs
Clinton will be pilloried by her Republican opponent, Ted Cruz, for her
character flaws and weaknesses in the face of America’s enemies. A large
chunk of the electorate will hold up the Clinton
name as an emblem of all that is wrong — and corrupt — about today’s
America. But elections are still won in the centre, or what is left of
it, and Mr Cruz will be too far to the right of the median voter to make
it to the White House. Despite uncomfortably close polls, Mrs Clinton
will win the electoral college by a landslide. Democrats will take back
the Senate. But she will start her term in a very polarised Washington.
There will be no honeymoon. Edward Luce

Will Britain leave the EU in the referendum expected in 2016?
No.
Britain will vote to stay in the European Union. Not with any sense of
enthusiasm or excitement but because the innate common sense of British
voters ultimately will prevail. Forget the technical arguments about
whether David Cameron manages to secure a good deal in his renegotiation
or whether the UK gets back its contribution to Brussels in increased
investment and trade. Consider instead the protagonists on both sides.
In the end voters will choose between the calm logic of former prime
minister John Major and the populism of Ukip’s Nigel Farage. My money is
on Mr Major. If I am wrong, Britain faces truly turbulent times.Philip StephensWill Bashar al-Assad still be in power 12 months from now?
Yes. Assad will remain nominally president of Syria in 2016, even if
in reality he has already been reduced to the status of the biggest
warlord rather than the ruler of a state. Militarily, he has been
bolstered by the Russian military intervention that has targeted his
rebel enemies. Politically, a US-Russian plan agreed in recent weeks
envisages an 18-month transition and is fraught with risks. Even in the
event that a peace process gains traction, Mr Assad will do his best to
stall and hold on to his seat of power in Damascus.Roula Khalaf

Robert Gordon’s magnum opus, The Rise and Fall of American Growth: the US Standard of Living Since the Civil War (out
in mid-January), is going to be an essential read for anyone interested
not only in US economic history but also American economic prospects.
The book is a comprehensive overview of growth from 1870 on, with a
close focus on innovation and productivity. It does not consider at all
macroeconomic policy, and is not much interested in events such as the
Great Depression or the creation and later collapse of Bretton Woods.
This is the supply-side story. This is not a criticism; as it is, the
book weighs in at 650 pages – 730 with notes etc.

There are three sections: the first covers 1870 to 1940; the second
1940-2015; the third is about the sources of growth and why it was
fastest from the 1920s to 1950s (this is just about the US so this is
earlier than European readers would recognise as the peak growth era) –
and is slowing now. The final chapters are a kind of crescendo, for the
whole book is organised to support Gordon’s well known thesis that the
days of miracle and wonder, the rapid growth era of the early to
mid-20th century, is long gone, and slower growth lies ahead of us. As
he writes in the introduction: “Our central thesis is that some inventions are more important than others,
and that the revolutionary century after the Civil War was made
possible by a unique clustering, in the late 19th century, of what we
will call the ‘Great Inventions’.” [his italics] By Great Inventions, he
means electricity, water supply and sewage systems, the internal
combustion engine, radio then TV, and innovations that reduced household
drudgery such as refrigerators and washing machines. The core of his
argument is that these so transformed health, life expectancy and
connectivity that no future invention could possibly have such a
dramatic impact on people’s living standards.

Who could argue with the idea that this era saw such dramatic change
in human lives? For that matter, it is also hard to argue with the
headwinds he notes about growth now: demographic change with ageing
populations, and inequality, limiting the mass market for future
innovations. The final chapters particularly emphasise the damaging
effects on the economy of greatly increased income and wealth
inequality. Hear, hear. What I find odd about Gordon’s argument is his
insistence that there is a kind of competition between the good old days
of ‘great innovations’ and today’s innovations – which are necessarily
different.

One issue is the extent to which he ignores all but a limited range of
digital innovation; low carbon energy, automated vehicles, new materials
such as graphene, gene-based medicine etc. don’t feature. The book
claims more recent innovations are occurring mainly in entertainment,
communication and information technologies, and presents these as simply
less important (while making great play of the importance of radio,
telephone and TV earlier). (A minor European carp – he also claims that
it is only Americans who invent things now, when it would be more
accurate to say it is only Americans who commercialise them to massive
scale, especially in digital....MORE

Baku. 30 December. REPORT.AZ/ Turkey's
EU membership will not happen in the next decade, while there is concern
that the EU will fall apart.

Report
informs citing the Russian media, this was stated by European
Commissioner for the Digital Economy and Information Society Günther
Oettinger, in his interview to Bild.

"Turkey's joining (to the EU) will not happen in this decade, maybe it will not happen in next decade also," said Oettinger.

He
added that he "sees a serious threat to disintegration of the EU",
which is to come to power in European "unstable and populist
governments."

According to the
European Commissioner, all countries in Europe must preserve the
opportunity to join the EU, if "they fulfill the conditions." This, in
particular, we are speaking of the Western Balkan countries, said
Oettinger.

"However, there is a need for strict conditions for admission. It will not be harmful, if the European Union acquires more new members over next 10 years," - said the commissioner.

Proof that literacy alone is not nearly enough to tackle the tragedy of stupidity.

From techdirt:

From the just-do-the-thing!-THE-THING!-how-much-more-clear-do-I-need-to-be?!?! dept

Here's the stupidest thing on piracy you're going to read today. Or this
month. Maybe even this whole holiday season. Rudy Shur, of Square One
Publishers, has a problem with piracy, which he thinks is actually a problem with Google.

After being contacted by Google Play with an offer to join the team,
Shur took it upon himself to fire off an angry email in response. That
would have been fine, but he somehow convinced Publisher's Weekly to print both the letter and some additional commentary.
Presumably, his position at a publishing house outweighed Publisher
Weekly's better judgment, because everything about his email/commentary
is not just wrong, but breathtakingly so.

After turning down the offer to join Google Play (Shur's previous
participation hadn't really shown it to be an advantageous
relationship), Shur decided to play internet detective. Starting with
this paragraph, Shur's arguments head downhill… then off a cliff… then
burst into flames… then the flaming wreckage slides down another hill
and off another cliff. (h/t The Digital Reader)

[W]e did discover, however, was that Google has no problem allowing
other e-book websites to illegally offer a number of our e-book titles,
either free or at reduced rates, to anyone on the Internet.

There's a huge difference between "allowing" and "things that happen
concurrently with Google's existence." Shur cannot recognize this
difference, which is why he's so shocked Google won't immediately fix
it.

When we alerted Google, all we got back was an email telling us that
Google has no responsibility and that it is up to us to contact these
sites to tell them to stop giving away or selling our titles.

Yep, it's called the DMCA process. It's been in all the papers. DMCA notices are issued to websites hosting the pirated material. Google also delists search results in response to DMCA notices. What never happens
is Google arbitrarily delisting sites just because someone notices
piracy exists. Google is also not "The Internet" and lacks the power to
shut down websites it doesn't own. It is not Google's job to police the
web for infringement, no more than it's Yahoo's or Microsoft's.

Let me ask you something. If a store sells knockoff designer
handbags, why is it okay for police to come in, confiscate the illegal
merchandise, and arrest and fine the store owners? It’s because the
store is profiting from the sales of these illegal goods, in the same
way Google can increase its advertising rates because these illegal
sites increase the number of users it attracts.

No, it's because the store is selling infringing goods. The store has
infringing goods on the premises. It's not because the store is
"profiting." It's because of what it's doing and what the store
contains. A better analogy would be to point out that cops can't raid a
business directory company just because it prints out pages that might
contain names and addresses of stores selling illicit goods.

The fact that Google advertises on its own search results pages is
beside the point. Ads will be served whether or not "pirate sites" show
up in the search results. The ads are not tied to illegal activity.
Whether or not some ads are "more profitable" (even if Shur's
postulation is true) doesn't matter.

The ETF for the S&P Energy Sector, the XLE is at $60.25, down 1% on the day, the ETF for the smaller Exploration & Production companies, the XOP, is at $29.66, down 2.40%.

From ZeroHedge, Dec. 29:

Yesterday, when Saudi Arabia revealed its "draconian" 2016 budget,
boosting gasoline prices by 40%, while trimming welfare programs after
forecasting a collapse in oil revenue (even while allocating the biggest
part of government spending in next year’s budget to defense and
security) Bloomberg reported that "the kingdom’s 2016 budget is probably based on crude prices of about $29 a barrel, according Riyadh-based Jadwa Investment Co."

Shortly thereafter Iran's Petroleum Minister Bijan Zangeneh said that
the Iran 2016-2017 budget assumes an average oil price of $40 dollars
per barrel. "There have been efforts to suggest in the budget the
closest and most possible price for oil, though the market is usually in
fluctuations," Zangeneh was quoted as saying by the local IRNA news
agency.

The reality is that nobody knows where oil prices will be in the coming year, especially if the supply glut persists, something which prompted BMO to warn that
unless there are dramatic changes in the supply picture, oil prices
could collapse as low as $20 in the short-term. "Fundamentally there is
simply too much oil" the Canadian bank summarized simply.

But now that price expectations have been significantly reset lower
to account for an OPEC which will likely continue to exceed its 30
million barrel per day target, one group's implied oil price estimate
stands out: that of energy investors.

Here is what BMO says is the oil price discount into current equity valuation.

At current prices we estimate that valuations for the oil and gas group reflect an implied Brent crude oil price in the range of $65-70/bbl while natural gas leveraged companies reflect a Henry Hub natural gas price in the range of $3.00/Mcf.

We have shown before that this is a problem for energy stock
valuations which, while not as extreme as they have been in recent
months, still discount energy earnings doubling over the near term with a
26x forward P/E, nearly double the recent historical average.

As the company-level chart further shows, not a single company's
valuation is "fair" at current oil prices. In fact, should oil persists
below $40, every single company in BMO's universe is overvalued.

In discussing the future of energy company valuations, BMO adds that
"while these generally represent attractive levels compared to our
longer-term commodity price expectations we see a higher likelihood of weaker crude oil prices over the next six months which would take valuations lower."

So why are energy multiples so persistently high? The answer is
simple: equity investors are basing their investment thesis on the oil
price corrections of 1998-1999 and 2008-2009, when likewise, multiples
spiked only to retrace, following a rise in oil prices. BMO next
explains how current equity valuations compare to prior downturns:...MORE

Turns out those Lego sets you got your kids for the holidays this year may be a pretty solid investment.

According to an analysis by the Telegraph, Lego sets have grown more in value over the last 15 years than the FTSE 100 stock market or the gold market.

The Telegraph estimates the average Lego set has gained 12 percent in value each year since 2000.
But you're only going to get that kind of return if the sets are un-opened and un-played with.
And what's the fun in that?

( Having focused the business down and down and down so that it’s pure corporatised education…)

-------PM

( And with corporatised education, er, falling slightly out of fashion…)

-------PM

( The next effort will be to slash costs — slashing with a blunt knife. A panic. )

-------PM

( My guess is 15 per cent of the workforce will go. )

-------

PM

( Across the board. )

PM

(except not in the boardroom, of course )

PM

(It’s a lucky escape for us, cos the 15 per cent cut would have hit us as well. 100 journo jobs would have gone. )

BE

Is that enough on banks? Actually, Goldman too. Just because.

--------
--------

PM

(If you look back to the late 90s, the FT had all the bits to construct Bloomgerg. )

PM

( Had a world class consumer offering in the form of the paper )

PM

(But it also had a newswire, and an online markets business — Market Watch.)

BE

Should we move on to other matters?

11:22AM

PM

(It had data, in the form of IDC)

PM

(Had Extel. Had what became factiva.)

PM

(Had a huge EM news business.)

BE

Okay …………. I think I have to do a quick bit of de-RAW here.

--------

BE

Coincidentally, we were chasing the same story from a slightly different angle.

BE

The rumour that reached us was that National Grid was working on a bid of around $45 a share for ITC …

PM

(People here complained of a lack of investment from Pearson. Investment???They were sucking the life-blood out of the thing. )

BE

… However, that would all appear to be very, very premature..

---------

BE

… However, that would all appear to be very, very premature..

BE

What we can say with some confidence is that National Grid’s in the ITC auction process, which kicked off a week ago …

BE

But NG only appointed a new CEO at the start of the month, and is in transition between the old guy and the new guy for the rest of the year.

BE

And NG’s balance sheet doesn’t make ~$7bn-ish deals look very easy.

BE

So. If National Grid’s involved …

BE

… It’s much more likely to be in there to look at the numbers of a rival, rather than to launch an offer.

PM

(Sure, there was one short period, during the dot comedy, that the FT was allowed to expand. It was a disaster, timing wise. But Pearson made up all the associated losses with one disposal — Market Watch. That covered everything.)

The following is presented as satire and in no way implies any knowledge of, or belief in, New World Order plans for total domination of an enslaved world population.cough, Soros, cough. buy gold, cough
From Mic:

These Actual Tin-Foil Hats Are for Hip Millennials Who Hate Government Mind Control

Tin-foil hats — DIY headwear that supposedly protects
wearers from mind reading — are the classic apparel of
conspiracy-obsessed paranoids who believe the government is out to trap
them. Now a company is aiming at hip millennials with fashion-forward
beanies and snapbacks in a sporty shade of gray.

Shield Headwear, which
seems like a pitch-perfect parody of earnest fashion-tech startups, is
launching its inaugural line of fresh headwear, and these lids are fast
on their way to being fully funded on Kickstarter. It's racing toward
its odd goal of $19,628, with almost $17,000 raised at time of writing.

According to its Kickstarter page, the Shield uses special
fabric to protect you from "electromagnetic smog." The project claims
that the hats will use cotton with 100% "pure silver" coating to reflect
and bounce off any kind of offensive electromagnetic or radio waves — a
dubious claim, even if the project is entirely real. (With
Kickstarters, sometimes it's hard to tell.)

The science is bad. The project hedges its claims with the kind
of language that just raises questions about the safety of radio waves
and Wi-Fi signals without actually backing them up, or even claiming
that these hats will work very well....MORE

I’ll do the same tomorrow and friday, but today I’d like to talk
about What Didn’t Happen, specifically which of my predictions in What Is Going To Happen did not come to be.

I said that the big companies that were started in the second half
of the last decade (Uber, Airbnb, Dropbox, etc) would start going public
in 2015. That did not happen. Not one of them has even filed
confidentially (to my knowledge). This is personally disappointing to
me. I realize that every company should decide how and when and if they
want to go public. But I believe the entire startup sector would benefit
a lot from seeing where these big companies will trade as public
companies. The VC backed companies that were started in the latter half
of that last decade that did go public in 2015, like Square, Box, and
Etsy (where I am on the board) trade at 2.5x to 5x revenues, a far cry
from what companies get financed at in the late stage private markets.
As long as the biggest venture backed companies stay private, this
dichotomy in valuations may well persist and that’s unfortunate in my
view.

I said that we would see the big Chinese consumer electronics
company Xiaomi come to the US. That also did not happen, although Xiaomi
has expanded its business outside of China and I think they will enter
the US at some point. I have a Xiaomi TV in my home office and it is a
really good product.

I predicted that asian messengers like WeChat and Line would make
strong gains in the US messenger market. That most certainly did not
happen. The only third party messengers (not texting apps) that seem to
have taken off in the US are Facebook Messenger, WhatsApp and our
portfolio company Kik.

Here’s a shot of the app store a couple days after the kids got new phones for Christmas.

I said that the Republicans and Democrats would find common ground
on challenging issues that impact the tech/startup sector like
immigration and net neutrality. That most certainly did not happen and
the two parties are as far apart as ever and now we are in an election
year where nothing will get done.

So I got four out of eleven dead wrong.

Here’s what I got right

VR has hit headwinds. Oculus still has not shipped the Rift (which I
predicted) and I think we will see less consumer adoption than many
think when it does ship. I’m not long term bearish on VR but I think the
early implementations will disappoint.

The Apple Watch was a flop. This is the one I took the most heat on.
So I feel a bit vindicated on this point. Interestingly another device
you wear on your wrist, the Fitbit, was the real story in wearables in
2015. In full disclosure own a lot of Fitbit stock via my friends at
Foundry.....

If The Big Short, Adam McKay’s adaptation of Michael Lewis’s book about the 2008 financial crisis and the subject of last month’s Vulture cover story,
got you all worked up over the holidays, you’re probably wondering what
Michael Burry, the economic soothsayer portrayed by Christian Bale
who’s always just a few steps ahead of everyone else, is up to these
days. In an email, which readers of the book will recognize as his
preferred method of communication, the real-life head of Scion Asset
Management answered some of our panicked questions about the state of
the financial system, his ominous-sounding water trade, and what, if
anything, we can feel hopeful about.

The movie portrays all of you as kind
of swashbuckling heroes in some ways, but McKay suggested to me that
you were very troubled by what happened. Is that the case? I
felt I was watching a plane crash. I actually had that dream again and
again. I knew what was happening, but there was nothing I, or anyone
else, could do to stop it. The last day of 2007, I couldn’t come home. I
was in the office till late at night, I couldn’t calm down. I wrote my
wife an email and just said, "I can’t come home; it’s just too upsetting
what’s happening, and I didn’t want to come home to my kids like this."
As for punishment of those responsible, borrowers were punished for
their overindulgences — they lost homes and lives. Let’s not forget
that. But the executives at the lenders simply got rich.

Were you surprised no one went to jail? I am shocked that
executives at some of the worst lenders were not punished for what they
did. But this is the nature of these things. The ones running the
machine did not get punished after the dot-com bubble either — all those
VCs and dot-com executives still live in their mansions lining the 280
corridor on the San Francisco peninsula. The little guy will pay for it —
the small investor, the borrower. Which is why the little guy needs to
be warned to be more diligent and to be more suspicious of society’s
sanctioned suits offering free money. It will always be seductive, but
that’s the devil that wants your soul.

When I spoke to some of the other real-life characters from The Big Short, I was surprised to hear that they thought that financial reform was pretty effective and that the system was much safer. Michael Lewis disagreed. In your opinion, did the crash result in any positive changes? Unfortunately,
not many that I can see. The biggest hope I had was that we would enter
a new era of personal responsibility. Instead, we doubled down on
blaming others, and this is long-term tragic. Too, the crisis,
incredibly, made the biggest banks bigger. And it made the Federal
Reserve, an unelected body, even more powerful and therefore more
relevant. The major reform legislation, Dodd-Frank, was named after two
guys bought and sold by special interests, and one of them should be
shouldering a good amount of blame for the crisis. Banks were forced, by
the government, to save some of the worst lenders in the housing
bubble, then the government turned around and pilloried the banks for
the crimes of the companies they were forced to acquire. The zero
interest-rate policy broke the social contract for generations of
hardworking Americans who saved for retirement, only to find their
savings are not nearly enough. And the interest the Federal Reserve pays
on the excess reserves of lending institutions broke the money
multiplier and handcuffed lending to small and midsized enterprises,
where the majority of job creation and upward mobility in wages occurs.
Government policies and regulations in the postcrisis era have aided the
hollowing-out of middle America far more than anything the private
sector has done. These changes even expanded the wealth gap by making
asset owners richer at the expense of renters. Maybe there are some
positive changes in there, but it seems I fail to see beyond the
absurdity....MORE

Tuesday, December 29, 2015

As you might have noticed over the past several days, the Russian
ruble is in a veritable tailspin. The inexorable decline in crude has
pressured the currency as have expectations of an uptick in year-end
budget spending.

The ruble fell to a record low against the dollar on Monday and
depending on crude’s trajectory, could well fall further in the new
year. 2015 will likely mark the third annual decline for the currency
which is under pressure not only from low oil prices, but from biting
economic sanctions tied to Moscow’s alleged role in Ukraine.

“The wish to hedge potential risks from geopolitics and commodities may well push the ruble to 75,” Evgeny Koshelev, an analyst at Rosbank PJSC in Moscow, told Bloomberg by e-mail
this week. “It will be interesting to see if there’s a reaction from
the central bank, government and households to this weakening.”

Yes, it will be “interesting”, especially if crude slides even
further. Here are Goldman’s projections based on three different prices
for oil:

At an oil price of
US$35/bbl, we think the Ruble will be around Rub72 or close to current
levels. Under that scenario we think inflation could be around 6% at end
2016.

At an oil price of
US$30/bbl, we think the Ruble will depreciate to about Rub77 or 10%
below current levels and end-year inflation in 2016 could be up to 6.7%.

At an oil price of US$25/bbl, the Ruble is likely to depreciate to the mid-80s and inflation is more likely to be up to 8% in December 2016.

While Goldman is fairly optimistic about what the future holds for
the Russian economy - which, you're reminded, is in the midst of its
deepest recession since 2009 - the Central Bank of Russia isn't so sure.
In fact, according to the bank's "risk scenario," oil prices could hover around US$35/bbl in 2016 while GDP could contract by 5% or more and inflation might be stuck at 7-9%.
Russia's 2016 budget assumes oil prices at $50/bbl. If that proves
correct, Moscow will run a deficit of about 3%. However, as Citi noted
earlier this month, "a $10bbl decline in oil prices worsens the fiscal
position by about 0.7% of GDP."

As Citi goes on to point out, the deterioration in the fiscal position
"already incorporates the secondary positive effect of the weaker
currency." In other words, the widening budget deficit associated with
falling crude prices takes into account the effect a concomitantly
weaker ruble has on RUB-denominated oil revenues.

So, combining this with the CRB's risk scenario as outlined above,
we're to understand that with oil at $35/bbl, Russia's projected deficit
jumps 23% to 3.7% of GDP which will itself decline 5% from a year
earlier while inflation runs at between 7-9%.

If, however, oil were to fall to $30/bbl, the situation worsens materially. Here's Citi again:

A fall of the oil prices to $30bbl will thus widen the fiscal
deficit to 4.4% of GDP. Given that the 2016 budget is based on an oil
price of $50bbl, this implies that the fiscal position may deteriorate
to -4.4% (-3.0% -2 times 0.7%) of GDP at oil of $30bbl.This is a
significant fiscal gap that would be the second largest over the last
20 years (largest deficit of 6.0% of GDP was recorded in 2009).

The fiscal outlook is further darkened by the trials and travails
of Vnesheconombank (VEB), the troubled state bank that's been crippled
by economic sanctions and is laboring under more than $15 billion in
foreign currency debt (which is of course a disaster given the ruble's
slide). As Bloomberg reports, VEB may need a massive state bailout that could end up costing upwards of $18 billion. Here's more:

VEB got its start under Soviet founder Vladimir Lenin as a bank
to finance foreign trade. Putin overhauled it in 2007. Flush with cash
from high oil prices, he pumped 180 billion rubles (worth about $7.3
billion at the time) in to boost capital and took over at chairman of
the board a year later.

When the global financial crisis struck in 2008, VEB became Putin’s main tool for managing the shock.
It got 1.25 trillion rubles (worth about $50 billion at the time) from
the government and central bank to shore up the plunging stock market,
help failing banks and bail out tycoons who were facing the loss of
their companies to foreign creditors....

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